The Price Elasticity of Demand for Common Stock





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    • Universität Bern (Switzerland) and Purdue University, Washington State University, and Merrill Lynch, respectively. Much of the work was completed while Cooney and Van Drunen were at the University of Utah. We have benefited from detailed reports by an anonymous referee for this journal, from suggestions by the editor René Stulz and from discussions with J. Brickley, K. French, L. Harris, A. Hess, A. Kalay, S. Kandel, J. McConnell, and D. Sheehan, as well as from the comments of S. Bhagat, B. Kracaw, D. Mauer, S. Mian, W. Mikkelson, M. Reinganum, and participants in seminars at Purdue University, the University of Utah, the University of Wisconsin, the 1986 European Finance Association Meetings, and the 1987 Western Finance Association Meetings. H. Stoll and R.A. Clark generously gave us data on the bid-ask spread. We thank Dave Van Drunen and Dave Zylstra for their careful research assistance and Lynch, Jones & Ryan for providing us with the Institutional Brokers Estimate System data.


We study the price elasticity of demand for the common stock of an individual corporation. Despite the prevelance of assumptions that demand is perfectly elastic, there is little if any direct evidence in the literature to either support or reject that contention. Consistent with the notion of finite price elasticities, we find that the announcement of primary stock offerings by regulated firms depresses their stock prices and little if any evidence that this decline is the result of adverse information about future cash flows. Attempts to relate offer announcement effects directly to possible determinants of price elasticities, however, are inconclusive.